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Institutional Investors

Corporate Research E-Letter No. 2, July 2000

Institutional Investors: Why They're Important and How to Find Information About their Holdings

by Philip Mattera

In 1976 management guru Peter Drucker published a book called The Unseen Revolution: How Pension Fund Socialism Came to America. Neither that form of socialism nor any other has arrived in the United States, but Drucker was correct in his main forecast: that the steady growth in the size of pension funds would give the managers of those funds increasing influence in the business world.

Pension funds make up the largest category of what are known as institutional investors. These entities, which together hold some 50 percent of all corporate stock, also include investment advisors, life insurance companies, commercial banks, foundations and endowments. They are all essentially money managers of one sort or another. They are responsible for investing the money set aside by employers to help pay for the retirement of their workers. They also manage the assets of individuals and organizations through trusts, mutual funds, annuities and other investment vehicles. As of the first quarter of this year, the combined corporate shareholdings of U.S. institutional investors amounted to nearly $10 trillion.

With these holdings come a great deal of power. The opinion of institutional investors about a company can determine the firm's fate in the stock market. Many institutions also have responsibility for deciding how to vote on candidates for corporate board seats and on resolutions that companies put before their shareholders. Remember that the corporate system of democracy is not based on "one man, one vote," but rather "one share, one vote." Institutions thus get to cast a lot of votes. For this reason these large investors are a major factor to consider in campaigns that challenge corporate policies on labor, the environment, consumers or the community.

"The Big Owners Roar"

Institutional investors were once passive custodians of their clients' accounts, and they tended to automatically vote their shares as management recommended. This docility was shaken in the 1980s when corporate raiders such as T. Boone Pickens and Carl Icahn attacked what they saw as the inefficiency of many corporate giants. Although hostile takeovers waned in the 1990s, many institutional investors did not return to their old ways. In many cases they became the ones targeting underperforming companies such as General Motors and Digital Equipment. As a Fortune magazine headline put it, "The Big Owners Roar."

Today the roar is not quite deafening, but activism among institutional investors is a significant force in the corporate world. Most of the major players fall into two categories:

Public pension funds. These are state-level bodies that manage the huge accumulations (more than $2 trillion) of retirement money set aside for state and local government employees. The largest and most active public pension fund, with assets of $175 billion, is the California Public Employees' Retirement System, or CALPERS for short.

Taft-Hartley pension funds. These are private-sector, multi-employer funds that are managed jointly by labor unions and employer groups (though in practice the unions usually call the shots). These funds, with total assets of about $400 billion, are concentrated in industries (such as construction) in which workers tend to have numerous employers.

Another important activist is the Teachers Insurance and Annuity Association-College Retirement Equity Fund (or TIAA-CREF), which manages $290 billion in assets mainly for university faculty and staff members.

Engaging the Institutions

Most of what goes by the name of institutional shareholder activism deals with issues of corporate governance. The big investors press companies to disclose more information about issues such as executive compensation, they put pressure on boards that don't exercise adequate oversight and they oppose efforts by managers to entrench themselves through devices such as poison pills (arrangements that discourage hostile takeovers by triggering adverse financial consequences in the event of a change in control of a corporation).

What's more difficult is to get institutions to use their power to change corporate policy on a social issue. The reason is that pension funds and other investment managers have a fiduciary obligation to their participants, which is usually interpreted as meaning that they have to do everything possible to achieve the highest return on their investment. Other considerations--such as worker rights, the environment and consumer protection--are not supposed to be considered, at least not explicitly. For this reason, unions and other practitioners of corporate campaigns frame their appeals to institutional investors in financial rather than moral terms. Using this approach, a labor-environmental coalition last year got CALPERS to support the effort to elect independent directors to the board of Maxxam Inc.

There are several ways for community groups to engage institutional investors during a corporate campaign.

Urge them to express concern to management about the corporate policy you are seeking to change (which you have expressed to them as a matter that might adversely affect the value of their holdings).

If you've done your homework and arranged for a resolution on your issue to be voted on at the company's annual meeting, ask for their votes.

If you're even more ambitious and are trying to unseat board members, ask the institutions for their support.

All of these assume some level of sympathy with your cause. There are times when institutions are completely unresponsive, and you have to treat them as adversaries. Some campaigns have protested a money manager's support for an unjust corporate policy by organizing a boycott of the money manager's services. For example, in 1997 the AFL-CIO put the heat on Dewey Square Investors Corp., a major investor in WHX Corp., during a strike by the Steelworkers union against WHX subsidiary Wheeling-Pittsburgh Steel. Faced with the possibility of losing union business, Dewey Square backed off its prior public support for WHX and helped to resolve the labor dispute.

How to Find Out What the Institutions Own

Before you can engage institutional investors, you need to know which ones are the major holders of stock in your target company. Institutions report their holdings to the Securities and Exchange Commission each quarter in a document called Form 13F. If they own five percent or more of the shares outstanding, they file a Form 13D. Companies list any five percent owners in their proxy statements, the filings in which they announce their annual meeting and disclose various kinds of information. Rarely does a single institution own as much as five percent of a large corporation, so proxies are a useful source of institutional ownership only in a limited number of situations.

There are several companies that collect the 13Fs and use them to create handy rankings of institutional ownership in each company. There are several ways to obtain these lists.

The most accessible version is to be found for free on the Internet, though the amount of information is limited. Go to the website at biz.yahoo.com, enter a company stock symbol and click on "Get Quote," then "Profile" and then "Top Institutional Holders." You will be shown a list of the Top ten institutional investors and their holdings.

The data on Yahoo is provided by a company called Vickers Stock Research, which also makes available a more detailed ownership database on Lexis-Nexis. Go to the COMPNY Library in Lexis-Nexis, choose the file VICSEC and enter a company name. You will be shown the same list of the Top ten institutional owners, along with a complete list of all institutions (and their holdings) in alphabetical order.

The best, but most expensive, ownership information can be obtained through a subscription service provided by Thomson Financial Securities Data (formerly known as CDA Spectrum). Thomson allows you to download a spreadsheet that includes detailed lists of institutional owners. These include important information not included in the sources above: an indication of whether a given institution votes the shares that it holds. This will allow you to focus your campaign activities on those institutions that are actually in a position to make a difference when it comes to a vote on a shareholder resolution or the election of board members. For more information on Thomson's services, see the website at www.tfsd.com.

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